An Overview of Nigerian Venture Capital and Private Equity
Nigeria is facing an uncertain future as outbreaks of ethnic and religious violence
continue to place strains on Africa’s most populated country. With the 2003 elections
approaching, the continuing battle amongst incumbent politicians and between competing
ethnic and regional groups is likely to intensify. Such an environment will test Nigeria’s
fragile democracy, which has never witnessed a hand over from one civilian government
to another. The Nigerian government is expected to continue with economic
liberalization, at a slow pace. The government’s main challenges will be to curb
spending, increase ...view middle of the document...
This is due to the fact that private equity is a fairly new phenomenon in Nigeria. The first
private equity fund in Nigeria, a $35 million fund sponsored by Capital Alliance Private
Equity (CAPE), was raised in 1998.
Nigeria’s banking industry has established the Small and Medium-Scale Industries Equity
Investment Scheme (SMEIS) to fund the country’s troubled businesses. Under the
scheme, launched on August 21st by President Obasanjo, all banks are required to set
aside 10% of their profit before tax annually for equity investment in small and mediumsized
industries for the next five years. CBN officials said that 33 banks had already set
aside N4.15bn (US$37m) for the scheme, which is expected to have annual funds of
around N5bn. Although the banking industry has yet to deploy the funds into companies
at this time, this will only slightly increase both the commitments to and the number of
private equity funds under management in Nigeria.
In terms of size relative to GDP, Nigeria’s private equity industry is much smaller than
the Israel (12.1% of GDP), USA (4.9% of GDP), the UK (2.3% of GDP) or South Africa
(4.2% of GDP). The relatively small size of Nigeria’s private equity market (as a
percentage of GDP) may indicate significant room for growth in the near future.
Types of funds
Significant players in the Nigerian private equity industry include the private equity
investment portfolios of government and aid agencies. Examples of these include CDC
Capital Partners (previously the Commonwealth Development Corporation) and the
International Finance Corporation (a division of the world bank).
Independent (third party managed) funds are not yet prevalent in Nigeria at the present
time. CAPE is the first independent fund in Nigeria. The fund is positioned as an
independent venture fund with a particular focus on startup and development capital
investments. Additionally, as a result of the SMEIS initiative, approximately three to
four new SME funds will be created by the end of 2002. This bodes well for
entrepreneurs who have found it difficult to secure startup or development capital from
local banking institutions. There are currently no buyout firms in Nigeria at this time.
Sources of funds
About 42% of Nigeria’s independent funds are sourced mainly from US and European
government and aid agencies, 17% from local banks, 25% from local pension funds, and
15% from partners and other sources. In Nigeria, institutional investors are reluctant to